Federal Tax Research, 11th Edition
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CHAPTER 1 m/y
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
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DISCUSSION QUESTIONS m/y
1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law,
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
accounting, economics, political science, and sociology. The environment for the tax
m/y m/y m/y m /y m/y m/y m/y m/y m/y m/y m/y
system is provided by the principles of economics, sociology, and political science, while the
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
legal and accounting fields are responsible for the system's interpretation and application.
m/y m/y m/y m/y m/y m/y m/y m/y m/y m /y m/y m/y
Each of these disciplines affects this country's tax system in a unique way. Economists
m/y m/y m/y m /y m/y m /y m/y m/y m/y m/y m/y m/y m/y
address such issues as how proposed tax legislation will affect the rate of inflation or
m/y m/y m/y m /y m/y m/y m/y m/y m/y m/y m/y m/y m /y m/y m/y
economic growth. Measurement of the social equity of a tax, and determining whether a tax
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m /y
system discriminates against certain taxpayers, are issues that are examined by sociologists
m/y m/y m/y m/y m/y m/y m/y m/y m/y m /y m/y m/y
and political scientists. Finally, attorneys are responsible for the inter- pretation of the
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
taxation statutes, and accountants ensure that these same statutes are applied consistently.
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Page 4 m/y
1-2. The other major categories of tax practice in addition to tax research are:
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• tax compliance m/y
• tax planning m/y
• taxlitigation /y
m
m/y Page 5 m/y
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying
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that information, and filing any necessary tax returns. Compliance also includes other
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functions necessary to satisfy governmental requirements, such as representing a client
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during an IRS audit.
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Page 5 m/y
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled
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agents, attorneys, and CPAs. Noncomplex individual, partnership, and corporate tax
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
returns often are completed by commercial tax preparers. The preparation of more
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
complex returns usually is performed by enrolled agents, attorneys, and CPAs. The latter
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
groups also provide tax planning services and represent their clients before the IRS.
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An enrolled agent is one who is admitted to practice before the IRS by passing a special IRS-
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
administered examination, or who has worked for the IRS for five years, and is issued a m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m /y m/y m/y m/y
permit to represent clients before the IRS. CPAs and attorneys are not required to take this
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
examination and are automatically admitted to practice before the IRS if they are in good
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standing with the appropriate professional licensing board.
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,Federal Tax Research, 11th Edition
m/y m/y m/y m/y Page 1-2 m/y
Page 5 and Circular 230
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1-5. Tax planning is the process of arranging one's financial affairs to minimize any tax liability.
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Much of modern tax practice centers around this process, and the resulting outcome is tax
m/y m/y m/y m/y m/y m /y m /y m/y m/y m /y m/y m/y m/y m/y m/y
avoidance. There is nothing illegal or immoral in the avoidance of taxa- tion, as long as the
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
taxpayer remains within legal bounds. In contrast, tax evasion constitutes the illegal
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nonpayment of a tax and cannot be condoned. Activities of this sort clearly violate existing
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legal constraints and fall outside of the domain of the professional tax practitioner.
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Page 6 m/y
1-6. In an open tax planning situation, the transaction is not yet complete, therefore, the tax
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practitioner maintains some degree of control over the potential tax liability, and the
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transaction may be modified to achieve a more favorable tax treatment. In a closed
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transaction however, all of the pertinent actions have been completed, and tax planning
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activities may be limited to the presentation of the situation to the government in the most
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legally advantageous manner possible.
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Page 6 m/y
1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically, a tax
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attorney handles tax litigation that progresses beyond the final IRS appeal.
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Page 6 m/y
1-8. CPAs serve is a support capacity in tax litigation.
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Page 6 m/y
1-9. Tax research consists of the resolution of unanswered taxation questions. The tax
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research process includes the following:
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1. Identification of pertinent issues; m/y m/y m/y
2. Specification of proper authorities; m/y m/y m/y
3. Evaluation of the propriety of authorities; and, m/y m/y m/y m/y m/y m/y
4. Application of authorities to a specific situation. m/y m/y m/y m/y m/y m/y
Page 6 m/y
1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before the
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IRS.
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,Federal Tax Research, 11th Edition
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1-11. In addition to Circular 230, CPAs must follow the AICPA's Code of Professional
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Conduct and Statements on Standards for Tax Services. CPAs must also abide by the
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rules of the appropriate state board(s) of accountancy.
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Page 7 m/y
1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved CE
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Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher course
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(AFTR) that covers filing season issues and tax law updates. The AFTR course must
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include a knowledge-based comprehension test administered at the conclusion of the
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course by the CE Provider.
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Limited practice rights allow individuals to represent clients whose returns they prepared and
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signed, but only before revenue agents, customer service representatives, and similar IRS
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employees.
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Page 10 and IRS.gov m/y m/y m/y
1-13. False. Only communication with the IRS concerning a taxpayer's rights, privileges, or
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liability is included. Practice before the IRS does not include representation before the Tax
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Court.
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1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including:
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matters connected with presentation to the Internal Revenue Service or any of its m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
officers or employees relating to a client's rights, privileges, or liabilities under
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laws or regulations administered by the Internal Revenue Service. Such
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presentations include the preparation and filing of necessary documents,
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correspondence with, and communications to the Internal Revenue Service, and
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the representation of a client at conferences, hearings, and meetings.
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Page 7 m/y
1-15. To become an Enrolled Agent an individual can (1) pass a test given by the IRS or (2) work
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for the IRS for five years. Circular 230, Subpart A, Secs. 10.4 to 10.6.
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Page 9 m/y
1-16. Enrolled Agents must complete 72 hours of Continuing Education every three years (an
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average of 24 per year, with a minimum of 16 hours during any year.). Circular 230,
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Subpart A. §10.6.
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Page 9 m/y
1-17. True. As a general rule, an individual must be an enrolled agent, attorney, or CPA to
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represent a client before the IRS. There are limited situations where others may represent a
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taxpayer; however, this fact pattern is not one of them. Since Leigh did not sign the return,
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she cannot represent the taxpayer, only Rose can.
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, Federal Tax Research, 11th Edition
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Pages 10-11 m/y
1-18. The names of organizations that can be represented by regular full-time employees are
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found in Circular 230, §10.7(c). A regular full-time employee can represent the employer
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(individual employer). A regular full-time employee of a partnership may represent the
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partnership. Also, a regular full-time employee of a trust, receivership, guardianship, or
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estate may represent the trust, receivership, guardianship, or estate. Furthermore, a
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m regular full-time employee of a governmental unit, agency, or authority may represent the
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governmental unit, agency, or authority in the course of his or her official duties.
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Page 10 m/y
1-19. Yes. Circular 230, Subpart A, Sec. 10.7.
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Page 10 m/y
1-20. True. A practitioner may be suspended or disbarred from practice before the IRS if he or she
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knowingly helps a suspended or disbarred person practice indirectly before the IRS.
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Page 12 m/y
1-21. A practitioner may not advise a client to take a position on a document, affidavit, or other
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paper submitted to the Internal Revenue Service unless the position is not frivolous.
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Circular 230 §10.34(b) m/y m/y
Page 14 m/y
1-22. Under Circular 230, an attorney, certified public accountant (CPA), or enrolled agent may
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use mass media (e.g., T.V. and the Internet) for advertising purposes. Such media may not
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contain false, fraudulent, unduly influencing, coercive, or unfair statements or claims.
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Attorneys, CPAs, and enrolled agents must also observe any applicable standards of ethical
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conduct adopted by the American Bar Association (ABA), the American Institute of
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Certified Public Accountants (AICPA), and the National Association of Enrolled Agents
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(NAEA). Additional standards and listing of items that may be included in mass media
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advertising are defined under Section 10.30 of Subpart B in Circular 230.
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Page 19 m/y
1-23. Under Section 10.25 of Circular 230, partners of government employees cannot represent
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anyone for which the government employee-partner has (or has had) official responsibility.
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For instance, a CPA firm with an IRS agent could not represent any taxpayer that is (or was
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in the past) assigned to the IRS agent-partner.
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Page 12 m/y
1-24. Under Section 10.21 of Circular 230, each attorney, CPA, enrolled agent, or enrolled
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actuary who knows that the client has not complied with the revenue laws of the United
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States or has made an error in or omission from any return, document, affidavit, or other
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m/y m/y m/y m/y Page 1-1 m/y
CHAPTER 1 m/y
AN INTRODUCTION TO TAX PRACTICE AND ETHICS
m/y m/y m/y m/y m/y m/y
DISCUSSION QUESTIONS m/y
1-1. In the United States, the tax system is an outgrowth of the following five disciplines: law,
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
accounting, economics, political science, and sociology. The environment for the tax
m/y m/y m/y m /y m/y m/y m/y m/y m/y m/y m/y
system is provided by the principles of economics, sociology, and political science, while the
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
legal and accounting fields are responsible for the system's interpretation and application.
m/y m/y m/y m/y m/y m/y m/y m/y m/y m /y m/y m/y
Each of these disciplines affects this country's tax system in a unique way. Economists
m/y m/y m/y m /y m/y m /y m/y m/y m/y m/y m/y m/y m/y
address such issues as how proposed tax legislation will affect the rate of inflation or
m/y m/y m/y m /y m/y m/y m/y m/y m/y m/y m/y m/y m /y m/y m/y
economic growth. Measurement of the social equity of a tax, and determining whether a tax
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m /y
system discriminates against certain taxpayers, are issues that are examined by sociologists
m/y m/y m/y m/y m/y m/y m/y m/y m/y m /y m/y m/y
and political scientists. Finally, attorneys are responsible for the inter- pretation of the
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
taxation statutes, and accountants ensure that these same statutes are applied consistently.
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
Page 4 m/y
1-2. The other major categories of tax practice in addition to tax research are:
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
• tax compliance m/y
• tax planning m/y
• taxlitigation /y
m
m/y Page 5 m/y
1-3. Tax compliance consists of gathering pertinent information, evaluating and classifying
m/y m/y m/y m/y m/y m/y m/y m/y m/y
that information, and filing any necessary tax returns. Compliance also includes other
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
functions necessary to satisfy governmental requirements, such as representing a client
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
during an IRS audit.
m/y m/y m/y m/y
Page 5 m/y
1-4. Most of the tax compliance work is performed by commercial tax preparers, enrolled
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agents, attorneys, and CPAs. Noncomplex individual, partnership, and corporate tax
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
returns often are completed by commercial tax preparers. The preparation of more
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
complex returns usually is performed by enrolled agents, attorneys, and CPAs. The latter
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
groups also provide tax planning services and represent their clients before the IRS.
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An enrolled agent is one who is admitted to practice before the IRS by passing a special IRS-
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administered examination, or who has worked for the IRS for five years, and is issued a m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m /y m/y m/y m/y
permit to represent clients before the IRS. CPAs and attorneys are not required to take this
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
examination and are automatically admitted to practice before the IRS if they are in good
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standing with the appropriate professional licensing board.
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,Federal Tax Research, 11th Edition
m/y m/y m/y m/y Page 1-2 m/y
Page 5 and Circular 230
m/y m/y m/y m/y
1-5. Tax planning is the process of arranging one's financial affairs to minimize any tax liability.
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
Much of modern tax practice centers around this process, and the resulting outcome is tax
m/y m/y m/y m/y m/y m /y m /y m/y m/y m /y m/y m/y m/y m/y m/y
avoidance. There is nothing illegal or immoral in the avoidance of taxa- tion, as long as the
m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
taxpayer remains within legal bounds. In contrast, tax evasion constitutes the illegal
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nonpayment of a tax and cannot be condoned. Activities of this sort clearly violate existing
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legal constraints and fall outside of the domain of the professional tax practitioner.
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Page 6 m/y
1-6. In an open tax planning situation, the transaction is not yet complete, therefore, the tax
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practitioner maintains some degree of control over the potential tax liability, and the
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transaction may be modified to achieve a more favorable tax treatment. In a closed
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transaction however, all of the pertinent actions have been completed, and tax planning
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activities may be limited to the presentation of the situation to the government in the most
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legally advantageous manner possible.
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Page 6 m/y
1-7. Tax litigation is the process of settling a dispute with the IRS in a court of law. Typically, a tax
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attorney handles tax litigation that progresses beyond the final IRS appeal.
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Page 6 m/y
1-8. CPAs serve is a support capacity in tax litigation.
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Page 6 m/y
1-9. Tax research consists of the resolution of unanswered taxation questions. The tax
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research process includes the following:
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1. Identification of pertinent issues; m/y m/y m/y
2. Specification of proper authorities; m/y m/y m/y
3. Evaluation of the propriety of authorities; and, m/y m/y m/y m/y m/y m/y
4. Application of authorities to a specific situation. m/y m/y m/y m/y m/y m/y
Page 6 m/y
1-10. Circular 230 is issued by the Treasury Department and applies to all who practice before the
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IRS.
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,Federal Tax Research, 11th Edition
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1-11. In addition to Circular 230, CPAs must follow the AICPA's Code of Professional
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Conduct and Statements on Standards for Tax Services. CPAs must also abide by the
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rules of the appropriate state board(s) of accountancy.
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Page 7 m/y
1-12. A return preparer must obtain 18 hours of continuing education from an IRS-approved CE
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Provider. The hours must include a 6 credit hour Annual Federal Tax Refresher course
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(AFTR) that covers filing season issues and tax law updates. The AFTR course must
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include a knowledge-based comprehension test administered at the conclusion of the
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course by the CE Provider.
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Limited practice rights allow individuals to represent clients whose returns they prepared and
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signed, but only before revenue agents, customer service representatives, and similar IRS
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employees.
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1-13. False. Only communication with the IRS concerning a taxpayer's rights, privileges, or
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liability is included. Practice before the IRS does not include representation before the Tax
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Court.
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1-14. Section 10.2 of Subpart A of Circular 230 defines practice before the IRS as including:
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matters connected with presentation to the Internal Revenue Service or any of its m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y m/y
officers or employees relating to a client's rights, privileges, or liabilities under
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laws or regulations administered by the Internal Revenue Service. Such
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presentations include the preparation and filing of necessary documents,
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correspondence with, and communications to the Internal Revenue Service, and
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the representation of a client at conferences, hearings, and meetings.
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Page 7 m/y
1-15. To become an Enrolled Agent an individual can (1) pass a test given by the IRS or (2) work
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for the IRS for five years. Circular 230, Subpart A, Secs. 10.4 to 10.6.
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Page 9 m/y
1-16. Enrolled Agents must complete 72 hours of Continuing Education every three years (an
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average of 24 per year, with a minimum of 16 hours during any year.). Circular 230,
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Subpart A. §10.6.
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Page 9 m/y
1-17. True. As a general rule, an individual must be an enrolled agent, attorney, or CPA to
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represent a client before the IRS. There are limited situations where others may represent a
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taxpayer; however, this fact pattern is not one of them. Since Leigh did not sign the return,
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she cannot represent the taxpayer, only Rose can.
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, Federal Tax Research, 11th Edition
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Pages 10-11 m/y
1-18. The names of organizations that can be represented by regular full-time employees are
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found in Circular 230, §10.7(c). A regular full-time employee can represent the employer
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(individual employer). A regular full-time employee of a partnership may represent the
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partnership. Also, a regular full-time employee of a trust, receivership, guardianship, or
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estate may represent the trust, receivership, guardianship, or estate. Furthermore, a
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m regular full-time employee of a governmental unit, agency, or authority may represent the
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governmental unit, agency, or authority in the course of his or her official duties.
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Page 10 m/y
1-19. Yes. Circular 230, Subpart A, Sec. 10.7.
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Page 10 m/y
1-20. True. A practitioner may be suspended or disbarred from practice before the IRS if he or she
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knowingly helps a suspended or disbarred person practice indirectly before the IRS.
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Page 12 m/y
1-21. A practitioner may not advise a client to take a position on a document, affidavit, or other
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paper submitted to the Internal Revenue Service unless the position is not frivolous.
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Circular 230 §10.34(b) m/y m/y
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1-22. Under Circular 230, an attorney, certified public accountant (CPA), or enrolled agent may
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use mass media (e.g., T.V. and the Internet) for advertising purposes. Such media may not
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contain false, fraudulent, unduly influencing, coercive, or unfair statements or claims.
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Attorneys, CPAs, and enrolled agents must also observe any applicable standards of ethical
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conduct adopted by the American Bar Association (ABA), the American Institute of
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Certified Public Accountants (AICPA), and the National Association of Enrolled Agents
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(NAEA). Additional standards and listing of items that may be included in mass media
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advertising are defined under Section 10.30 of Subpart B in Circular 230.
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Page 19 m/y
1-23. Under Section 10.25 of Circular 230, partners of government employees cannot represent
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anyone for which the government employee-partner has (or has had) official responsibility.
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For instance, a CPA firm with an IRS agent could not represent any taxpayer that is (or was
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in the past) assigned to the IRS agent-partner.
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Page 12 m/y
1-24. Under Section 10.21 of Circular 230, each attorney, CPA, enrolled agent, or enrolled
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actuary who knows that the client has not complied with the revenue laws of the United
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States or has made an error in or omission from any return, document, affidavit, or other
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